THE KOREA ECONOMIC DAILY, GLOBAL EDITION

South Korea’s headline inflation slowed below 2% for the first time in three and a half years in September on lower international oil prices, reinforcing views that the country’s central bank would cut the policy rate for the first time in four and a half years.

Consumer prices in September rose 1.6% from the same month last year, below the Bank of Korea’s target inflation of 2.0%, according to data released by Statistics Korea on Wednesday.

This is the first time the country’s inflation has dipped below 2% since March 2021 when consumer prices rose 1.9% on-year. It is also the slowest increase since February 2021's 1.4% gain.

The country’s annual core inflation less food and energy prices tracked by the Organization for Economic Co-operation and Development (OECD) increased 2.0% from a year ago, off 0.1 percentage point from the prior month.

The moderation is owed largely to lower international oil prices.

But a spike in oil prices following the military conflicts between Iran and Israel this week coupled with high fresh vegetable prices remains a risk, said an official from Statistics Korea.

The country’s vegetable prices in September jumped 11.5% on-year due to the scorching hot weather. Against a month ago, it added 18.6%, marking the biggest on-month addition since August 2020 with a 24.3% rise.

HIGHER BETS ON A BOK RATE CUTE

The tamed inflation led investors to bet on a big rate cut by the Bank of Korea this year.

Government bond yields fell across the board on Wednesday following the release of the inflation data, with the highly liquid three-year debt yield down 3.1 basis points (bps) from the previous session to close at 2.780%, according to the Korea Financial Investment Association.

The five-year debt yield also dipped 4.4 bps to 2.843% and the 10-year yield slipped 6.0 bps to 2.932%.

Korea’s current policy rate stands at 3.50% after the BOK kept the rate at the current level, which is a 15-year high, for a 13th consecutive time in August – the longest such run in the country.

The last time the central bank cut the rate was in May 2020 in the aftermath of the country’s financial market routs caused by COVID-19 outbreaks.  

The central bank will hold the next base rate-setting meeting on Friday next week and then this year’s last monetary policy meeting on Nov. 28.

The latest inflation trend in Korea has put great pressure on the Bank of Korea to pivot toward monetary easing before it is too late. The central bank has remained hesitant to cut the rate largely due to the country's ballooning household debt. 

After the August monetary policy meeting, BOK Governor Rhee Chang-yong also hinted at an interest rate cut as early as this month, citing the downward trend in inflation.

The country’s inflation moderated 2.0% in August after a 2.6% gain in July. It remained below the 3% level for the sixth straight month in September.

During the last monetary policy meeting, the central bank trimmed Korea’s gross domestic product growth forecast to 2.4% for 2024 from its May forecast of 2.5%. It also lowered this year’s inflation estimate to 2.5% from the previous forecast of 2.6%.

Korea’s finance ministry reiterated its expectation that the country’s inflation would hover around 2% for the rest of this year if there were no more extreme weather events or external shocks.

Write to Jin-gyu Kang at josep@hankyung.com

Sookyung Seo edited this article.